David Sm13e Cn 22

Avon Products Inc. - 2009Case Notes Prepared by: Dr. Mernoush Banton

Case Authors: Rochelle R. Brunson and Marlene M. Reed

A. Case Abstract

Avon Products Inc. (www.avoncompany.com) is a comprehensive strategic management case that includes the company’s calendar December 31, 2008 financial statements, competitor information and more. The case time setting is the year 2009. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in New York, New York, Avon Products Inc. is traded on the New York Stock Exchange under ticker symbol AVP.

B. Vision Statement (Actual)

To be the company that best understands and satisfies the product, service and self-fulfillment needs of women-globally.

Vision Statement (Proposed)

To be the first choice to our customers who want ultimate beauty, health and self confidence.

C. Mission Statement (Actual)

The Global Beauty Leader—We will build a unique portfolio of Beauty and related brands, striving to surpass our competitors in quality, innovation and value, and elevating our image to become the Beauty company most women turn to worldwide. (1, 2)

The Women’s Choice for Buying—We will become the destination store for women, offering the convenience of multiple brands and channels, and providing a personal high touch shopping experience that helps create lifelong customer relationships.

The Premier Direct Seller— We will expand our presence in direct selling and lead the reinvention of the channel, offering an entrepreneurial opportunity that delivers superior earnings, recognition, service and support, making it easy and rewarding to be affiliated with Avon and elevating the image of our industry. (3)

The Best Place to Work—We will be known for our leadership edge, through our passion for high standards, our respect for diversity and our commitment to create exceptional opportunities for professional growth so that associates can fulfill their highest potential. (9)

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall.

The Largest Women’s Foundation—We will be a committed global champion for the health and well-being of women through philanthropic efforts that eliminate breast cancer from the face of the earth, and that empower women to achieve economic independence.

The Most Admired Company—We will deliver superior returns to our shareholders by tirelessly pursuing new growth opportunities while continually improving our profitability, a socially responsible, ethical company that is watched and emulated as a model of success. (5, 7)

The five values of Avon are: Trust, respect, belief, humility, and integrity. (6, 8)

Mission Statement (Proposed – to be added) The Most Technologically Advanced eCommerce—We offer a wide

selection of products through dedicated and knowledgeable intermediaries and through a secure, innovative and user friendly web site. (4)

1. Customer2. Products or services3. Markets4. Technology5. Concern for survival, profitability, growth6. Philosophy7. Self-concept8. Concern for public image9. Concern for employees

D. External Audit

CPM – Competitive Profile Matrix

Avon Revlon Mary Kay

Critical Success Factors WeightRatin

gWeighted Score

Rating

Weighted Score

Rating

Weighted Score

Price competitiveness 0.10 3 0.30 4 0.40 2 0.20

Global Expansion 0.09 3 0.27 4 0.36 2 0.18

Organizational Structure 0.04 2 0.08 4 0.16 3 0.12

Employee Morale 0.07 2 0.14 4 0.28 1 0.07

Technology 0.10 4 0.40 2 0.20 3 0.30

Product Safety 0.10 4 0.40 3 0.30 2 0.20

Customer Loyalty 0.10 2 0.20 4 0.40 3 0.30

Market Share 0.07 2 0.14 4 0.28 3 0.21

Advertising 0.10 2 0.20 4 0.40 1 0.10

Product Quality 0.10 2 0.20 3 0.30 1 0.10


Product Image 0.05 3 0.15 4 0.20 2 0.10

Financial Position 0.08 4 0.32 3 0.24 2 0.16

Total 1.00 2.80 3.52 2.04

Opportunities

1. The cosmetics industry tend to be countercyclical2. Demand for such products normally remains constant and unaffected by

economic distress3. The compound annual growth rate for eye makeup will be 1.31 percent

compared to -0.26 percent for overall color cosmetics for the period 2009 to 2113

4. A growing trend in the cosmetics industry is the introduction of “green” products

5. Aveda Cosmetics found that 68 percent of consumers will remain loyal to a company that has a social and environmental commitment

6. Many consumers are now “voting with dollars” for organic products and supporting brands that support values similar to their own

7. The baby boomers are aging and they are more conscious on how they look and improving their looks

Threats1. In terms of color cosmetics, Euromonitor International, Inc. predicts that

many of these markets will see a slowdown in volume demand2. The global economic climate will stifle new product development,

innovation, and sustainability programs in 20093. An economic slowdown usually curbs companies from investing in

research and development, and it is that research that has brought forth a wealth of green cosmetics

4. Amarjit Sahota of Organic Monitor forecasts that consumers are unlikely to give up their commitments to organic products just to save a few pennies

5. The industry is highly competitive among well known brand and specials offer through department stores

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score

Opportunities

1. The cosmetics industry tend to be countercyclical

0.1 4 0.4


2. Demand for such products normally remains constant and unaffected by economic distress

0.1 4 0.4

3. The compound annual growth rate for eye makeup will be 1.31 percent compared to -0.26 percent for overall color cosmetics for the period 2009 to 2113

0.09 3 0.27

4. A growing trend in the cosmetics industry is the introduction of "green" products

0.08 4 0.32


0.07 3 0.21

6. Many consumers are now "voting with dollars" for organic products and supporting brands that support values similar to their own

0.09 4 0.36


0.08 4 0.32

Threats

1. In terms of color cosmetics, Euromonitor International, Inc. predicts that many of these markets will see a slowdown in volume demand

0.1 2 0.2

2. The global economic climate will stifle new product development, innovation, and sustainability programs in 2009

0.09 2 0.18

3. An economic slowdown usually curbs companies from investing in research and development, and it is that research that has brought forth a wealth of green cosmetics

0.06 3 0.18


0.07 2 0.14


0.07 2 0.14

Total 1.00 3.12

Positioning Map


E. Internal Audit

Strengths

1. The company is the world’s largest direct seller with 5.4 million Avon representatives in over 100 countries

2. There are minimal startup costs for an Avon business representative3. The brand has been found to have 90 percent recognition worldwide and

is listed as one of the world’s top global brands4. In 2007, the company increased its investment in representatives by over

$120 million – for initiatives including the rollout of a new sales leadership opportunity, improved training, and changes in the commission structure

5. The company funded new Web-based and mobile technology tools6. The Beauty division had a 9.6 percent increase in revenues7. Latin America contributes more revenue and profit for Avon than any other

area8. Avon announced a celebrity deal with Courteney Cox to be the face of the

brand’s new women’s fragrance, Spotlight, which was set to launch in April 2009

9. Many locations of the company is ISO14001 certified

Weaknesses


Quality (High)

Quality (Low)

Price (High)

Price (Low)

Mary Kay

Avon

Revlon

1. Avon’s business model provides for the company to sell products to its representatives on credit; so that for the most part, the representatives do not pay the company until they get paid by their customers. This requires outlay of inventory till the inventory is sold

2. Avon’s Home segment had a 3.2 percent decline in revenues in 2008 3. The company’s ad spending went from $136 million in 2005 to $249 million in

2006 and $368 million in 2007. Avon’s ad budget for 2008 was 14 percent higher than the year before

4. Avon reported first quarter 2009 total revenue of $2.2 billion which was 13 percent lower than that of 2008’s first quarter

5. Beauty sales in the first quarter 2009 were 12 percent lower versus the prior year period

6. Avon is implementing a 2009 restructuring program that includes closure of two manufacturing facilities

Financial Ratio Analysis (December 2009)

Growth Rates % Avon Industry S&P 500

Sales (Qtr vs year ago qtr) -3.50 -3.00 -4.80Net Income (YTD vs YTD) -44.70 9.80 -6.00Net Income (Qtr vs year ago qtr) -29.90 10.40 26.80Sales (5-Year Annual Avg.) 9.33 8.34 12.99Net Income (5-Year Annual Avg.) 5.66 9.06 12.69Dividends (5-Year Annual Avg.) 13.75 11.62 11.83

Price Ratios Avon Industry S&P 500

Current P/E Ratio 23.0 17.7 26.7P/E Ratio 5-Year High NA 0.6 16.6P/E Ratio 5-Year Low NA 0.1 2.6Price/Sales Ratio 1.34 2.14 2.25Price/Book Value 12.77 5.22 3.48Price/Cash Flow Ratio 18.30 13.50 13.70

Profit Margins % Avon Industry S&P 500

Gross Margin 62.1 50.8 38.9Pre-Tax Margin 8.7 17.4 10.3Net Profit Margin 5.9 12.6 7.15Yr Gross Margin (5-Year Avg.) 61.3 52.4 38.65Yr PreTax Margin (5-Year Avg.) 11.1 16.7 16.65Yr Net Profit Margin (5-Year Avg.) 7.9 11.8 11.5


Financial Condition Avon Industry S&P 500

Debt/Equity Ratio 2.62 0.78 1.09Current Ratio 1.8 1.2 1.5Quick Ratio 1.3 0.8 1.3Interest Coverage 12.6 16.3 23.7Leverage Ratio 6.4 2.7 3.4Book Value/Share 2.47 17.27 21.63Adapted from www.moneycentral.msn.com

Avg P/E Price/ Sales Price/ BookNet Profit

Margin (%)

12/08 17.50 0.97 15.18 8.212/07 31.00 1.74 23.76 5.312/06 28.70 1.69 18.45 5.412/05 19.60 1.64 16.23 10.412/04 22.70 2.39 19.20 10.912/03 21.90 2.38 42.77 9.712/02 22.90 2.13 -99.24 8.612/01 24.00 1.91 -146.55 7.412/00 18.90 2.03 -52.84 8.512/08 17.50 0.97 15.18 8.2

Book Value/

ShareDebt/

EquityReturn on Equity (%)

Return on Assets (%)

Interest Coverage

12/08 $1.58 3.69 129.7 14.4 13.312/07 $1.66 2.95 74.6 9.3 7.812/06 $1.79 2.26 60.4 9.1 7.612/05 $1.76 2.08 106.7 17.8 21.212/04 $2.02 0.97 89.0 20.4 36.412/03 $.79 3.02 179.0 18.6 31.312/02 -$.27 -10.75 -418.6 16.1 16.612/01 -$.16 -17.64 -592.4 14.0 10.712/00 -$.45 -5.62 -225.1 17.2 9.312/08 $1.58 3.69 129.7 14.4 13.3

Adapted from www.moneycentral.msn.com

Internal Factor Evaluation (IFE) Matrix


http://www.moneycentral.msn.com/

http://www.moneycentral.msn.com/

Key Internal Factors Weight Rating Weighted Score

Strengths

1. The company is the world's largest direct seller with 5.4 million Avon representatives in over 100 countries

0.08 4 0.32

2. There are minimal startup costs for an Avon business representative

0.09 4 0.36

3. The brand has been found to have 90 percent recognition worldwide and is listed as one of the world's top global brands

0.07 4 0.28

4. In 2007, the company increased its investment in representatives by over $120 million - for initiatives including the rollout of a new sales leadership opportunity, improved training, and changes in the commission structure

0.05 3 0.15

5. The company funded new Web-based and mobile technology tools

0.09 4 0.36

6. The Beauty division had a 9.6 percent increase in revenues

0.07 3 0.21

7. Latin America contributes more revenue and profit for Avon than any other area

0.06 4 0.24

8. Avon announced a celebrity deal with Courteney Cox to be the face of the brand's new women's fragrance, Spotlight, which was set to launch in April 2009

0.06 3 0.18


0.05 3 0.15

Weaknesses

1. Avon's business model provides for the company to sell products to its representatives on credit; so that for the most part, the representatives do not pay the company until they get paid by their customers. This requires outlay of inventory till the inventory is sold

0.07 2 0.14

2. Avon's Home segment had a 3.2 percent decline in revenues in 2008

0.08 1 0.08

3. The company's ad spending went from $136 million in 2005 to $249 million in

0.06 2 0.12


2006 and $368 million in 2007. Avon's ad budget for 2008 was 14 percent higher than the year before

4. Avon reported first quarter 2009 total revenue of $2.2 billion which was 13 percent lower than that of 2008's first quarter

0.07 1 0.07


0.04 1 0.04


0.06 2 0.12

Total 1.00 2.82

F. SWOT Strategies

Strengths Weaknesses1. The company is the

world’s largest direct seller with 5.4 million Avon representatives in over 100 countries


3. The brand has been found to have 90 percent recognition worldwide and is listed as one of the world’s top global brands

4. In 2007, the company increased its investment in representatives by over $120 million – for initiatives including the rollout of a new sales leadership opportunity, improved training, and changes in the

1. Avon’s business model provides for the company to sell products to its representatives on credit; so that for the most part, the representatives do not pay the company until they get paid by their customers. This requires outlay of inventory till the inventory is sold

2. Avon’s Home segment had a 3.2 percent decline in revenues in 2008

3. The company’s ad spending went from $136 million in 2005 to $249 million in 2006 and $368 million in 2007. Avon’s ad budget for


commission structure5. The company funded

new Web-based and mobile technology tools



8. Avon announced a celebrity deal with Courteney Cox to be the face of the brand’s new women’s fragrance, Spotlight, which was set to launch in April 2009


2008 was 14 percent higher than the year before

4. Avon reported first quarter 2009 total revenue of $2.2 billion which was 13 percent lower than that of 2008’s first quarter



OpportunitiesS-O Strategies

W-O Strategies

1. The cosmetics industry tend to be countercyclical



4. A growing trend in the cosmetics industry is the introduction of “green” products

5. Aveda Cosmetics found that 68 percent of consumers will remain

1. Promote the business representatives through social network channels such as Facebook, Twitter and others (S1, S2, S3, S5, O1, O2, O3)

2. Improve R&D by introducing more “green” products (S3, O6, O7)

1. Offer a deep discount to representatives that would be willing to pay for their inventory in advance instead of credit (W1, W2, O1, O2)

2. Offer Online coupons and discounts to loyal customers when reordering their products online (W2, W4, O1, O7)


loyal to a company that has a social and environmental commitment

6. Many consumers are now “voting with dollars” for organic products and supporting brands that support values similar to their own


ThreatsS-T Strategies

W-T Strategies

1. In terms of color cosmetics, Euromonitor International, Inc. predicts that many of these markets will see a slowdown in volume demand




1. Improve marketing strategies (product placement, billboards, mail-in discounts / coupons, Online coupons, etc.) to existing and new customers (S1, S2, S3, T1, T5)

1. Continue discounting products that are not selling well and then completely remove them from the line (W2, W3, T5)

2. If necessary restructure manufacturing to plants with idle capacity and shut down additional facilities (W3, W6, T2, T3)




G. SPACE Matrix

Financial Stability (FS) Environmental Stability (ES)Return on Investment 3 Unemployment -4Leverage 2 Technological Changes -3Liquidity 5 Price Elasticity of Demand -1Working Capital 5 Competitive Pressure -4Cash Flow 5 Barriers to Entry -4

Financial Stability (FS) Average 4 Environmental Stability (ES) Average -3.2

Competitive Stability (CS) Industry Stability (IS)Market Share -3 Growth Potential 5Product Quality -3 Financial Stability 4Customer Loyalty -2 Ease of Market Entry 3Competition’s Capacity Utilization -3 Resource Utilization 2


FS

CS

ES

IS654321

Conservative Aggressive

CompetitiveDefensive

1

2

3

4

5

6

7-2-3-4-5-7 -1-6

7

-7

-6

-5

-4

-3

-2

-1

Technological Know-How -3 Profit Potential 4

Competitive Stability (CS) Average -2.8 Industry Stability (IS) Average 3.6

Y-axis: FS + ES = 4.0 + (-3.2) = 0.8X-axis: CS + IS = (-2.8) + (3.6) = 1.2

H. Grand Strategy Matrix

1. Market development2. Market penetration3. Product development4. Forward integration5. Backward integration6. Horizontal integration7. Related diversification


Weak Competitive

Position

Quadrant II Quadrant I

Quadrant IVQuadrant III

StrongCompetitive

Position

Rapid Market Growth

Slow Market Growth

I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong3.0 to 4.0

Average2.0 to 2.99

Weak1.0 to 1.99

High3.0 to 3.99

I II

Avon Products

III

Medium2.0 to 2.99

IV IV VI

Low1.0 to 1.99

VII VIII IX

J. QSPM

Improve marketing strategies (product

placement, billboards,

mail-in discounts / coupons,

Online coupons, etc.) to

existing and

Improve R&D by

introducing more “green”

products


The EFE Total

Weighted Score

new customers

Key Factors Weight AS TAS AS TAS

Opportunities 1. The cosmetics industry tend to be

countercyclical0.1 --- --- --- ---


0.1 --- --- --- ---


0.09 --- --- --- ---

4. A growing trend in the cosmetics industry is the introduction of "green" products

0.08 1 0.08 4 0.32


0.07 1 0.07 4 0.28

6. Many consumers are now "voting with dollars" for organic products and supporting brands that support values similar to their own

0.09 1 0.09 4 0.36


0.08 --- --- --- ---

Threats 1. In terms of color cosmetics, Euromonitor

International, Inc. predicts that many of these markets will see a slowdown in volume demand

0.1 3 0.30 1 0.1


0.09 2 0.18 1 0.09


0.06 2 0.12 1 0.06


0.07 3 0.21 1 0.07


0.07 1 0.07 4 0.28

TOTAL 1.00 1.12 1.56Strengths 1. The company is the world's largest direct 0.08 4 0.32 2 0.16


seller with 5.4 million Avon representatives in over 100 countries


0.09 --- --- --- ---

3. The brand has been found to have 90 percent recognition worldwide and is listed as one of the world's top global brands

0.07 --- --- --- ---

4. In 2007, the company increased its investment in representatives by over $120 million - for initiatives including the rollout of a new sales leadership opportunity, improved training, and changes in the commission structure

0.05 --- --- --- ---

5. The company funded new Web-based and mobile technology tools

0.09 --- --- --- ---


0.07 3 0.21 1 0.07


0.06 --- --- --- ---

8. Avon announced a celebrity deal with Courteney Cox to be the face of the brand's new women's fragrance, Spotlight, which was set to launch in April 2009

0.06 3 0.18 1 0.06


0.05 --- --- --- ---

Weaknesses 1. Avon's business model provides for the

company to sell products to its representatives on credit; so that for the most part, the representatives do not pay the company until they get paid by their customers. This requires outlay of inventory till the inventory is sold

0.07 --- --- --- ---

2. Avon's Home segment had a 3.2 percent decline in revenues in 2008

0.08 2 0.16 1 0.08

3. The company's ad spending went from $136 million in 2005 to $249 million in 2006 and $368 million in 2007. Avon's ad budget for 2008 was 14 percent higher than the year before

0.06 3 0.18 1 0.06

4. Avon reported first quarter 2009 total revenue of $2.2 billion which was 13 percent lower than that of 2008's first quarter

0.07 --- --- --- ---


0.04 1 0.04 3 0.12


0.06 --- --- --- ---


SUBTOTAL 1.00 1.09 0.55SUM TOTAL ATTRACTIVENESS SCORE 2.21 2.11

K. Recommendations

Increase marketing / advertising budget by $50 million, 70% to be spent on online advertising and 30% spent on print and other form of media.

L. EPS/EBIT Analysis

$ Amount Needed: $50 millionStock Price: $31.90Tax Rate: 29.3%Interest Rate: 5.05% # Shares Outstanding: 427.1 Million

Common Stock Financing Debt Financing Recession Normal Boom Recession Normal BoomEBIT $750,000,000 $1,500,000,000 $2,000,000,000 $750,000,000 $1,500,000,000 $2,000,000,000Interest 0 0 0 2,750,000 2,750,000 2,750,000EBT 750,000,000 1,500,000,000 2,000,000,000 747,250,000 1,497,250,000 1,997,250,000Taxes 219,750,000 439,500,000 586,000,000 218,944,250 438,694,250 585,194,250EAT 530,250,000 1,060,500,000 1,414,000,000 528,305,750 1,058,555,750 1,412,055,750# Shares 428,667,398 428,667,398 428,667,398 427,100,000 427,100,000 427,100,000EPS 1.24 2.47 3.30 1.24 2.48 3.31

70 Percent Stock - 30

Percent Debt

70 Percent Debt - 30 Percent Stock

Recession Normal Boom Recession Normal BoomEBIT $750,000,000 $1,500,000,000 $2,000,000,000 $750,000,000 $1,500,000,000 $2,000,000,000Interest 2,200,000 2,200,000 2,200,000 550,000 550,000 550,000EBT 747,800,000 1,497,800,000 1,997,800,000 749,450,000 1,499,450,000 1,999,450,000Taxes 219,105,400 438,855,400 585,355,400 219,588,850 439,338,850 585,838,850EAT 528,694,600 1,058,944,600 1,412,444,600 529,861,150 1,060,111,150 1,413,611,150# Shares 428,197,179 428,197,179 428,197,179 427,570,219 427,570,219 427,570,219EPS 1.23 2.47 3.30 1.24 2.48 3.31

M. Epilogue

On May 5, 2009, Avon Products, Inc. reported first-quarter 2009 total revenue of $2.2 billion which was 13 percent lower than that of 2008’s first quarter. However, this was up 3 percent on a local currency basis as foreign exchange


pressured growth by 16 percentage points. Beauty sales in the first quarter 2009 were 12 percent lower versus the prior year period but increased 5 percent on a local currency basis. Beauty units increased 2 percent, and nits overall were flat with the prior year quarter. Active Representatives (sales associates) grew 7 percent.

First quarter gross margin of 62.8 percent was 30 basis points below that of the prior year quarter as price increases, manufacturing productivity gains and benefits from the company’s Strategic Sourcing initiative (SSI) helped to mitigate over 2 percentage points of unfavorable transaction exchange impact.

Selling, general and administrative expense rose as a percent of revenue 390 basis points versus 2008’s first quarter. Strategic spending increased as a percent of revenue in the first quarter as the company focused spending early in the year in an effort to benefit sooner from new Representatives. Despite the first quarter level of investment, the company still expects full year combined strategic investments in advertising and its Representative Value Proposition (RVP) to remain constant as a percent of revenue.Advertising expense total $78 million in the first quarter, with a shift toward Representative recruitment advertising from product advertising. Avon also invested $11 million incrementally in the quarter for initiatives to improve RVP. The 2009 quarter also included investment in additional sales brochures and flyers to highlight the company’s smart value product range.

On May 7, 2009, Avon declared a regular quarterly dividend on its common stock of $.21 per share, payable June 1, 2009, to shareholders of record May 21, 2009.

Andrea Jung, Chairman and CEO, remarked, “We plan to leverage the inherent advantages of our direct selling business model during this time of uncertainty. We are offering consumers an increased assortment of ‘smart value’ products—great quality products at affordable price points—which contributed to Beauty unit growth of 2 percent in the quarter. We are also aggressively promoting our Representative earnings opportunity to a wider audience. The early strength of this new recruiting effort reflects the growing relevance of the Avon earnings opportunity.”

Jung concluded regarding the current economic crisis, “Despite the current challenges of foreign exchange and the global economic recession, we see this as a moment of opportunity. We intend to leverage our unique brand and direct-selling channel advantages in order to gain market share. Coupled with our multi-year turnaround strategy, we will use this moment to emerge a stronger and more competitive company in the future.”


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David Sm13e Cn 22